What a Recession Could Mean for Canada’s Real Estate Industry
The predictions are in (and have been for a while) – Canada is headed for an economic recession in 2023, per most experts, though it is forecasted to be less severe than previously anticipated.
According to RBC economists, the predicted downturn could occur as early as in the next three months (Q1 2023). One recent survey found that over 80% of Canadians are “worried about the possibility of a recession over the next 12 months,” with 56% “actively preparing” for the downturn in some way.
But what does this mean for Canada’s pivotal real estate and construction industry?
But what does this mean for your business?
A recession will likely have an impact on both ends of the real estate market. On the one hand, it will, of course, affect the value of finished products, but (much like inflation) it will also affect the development process and associated costs.
Developers will likely have to prioritize their projects to ensure the most profitable ones are seen through. This will likely lead to a drop in construction of single and multi-family homes, instead of large commercial properties. Further, if valuations fall, developers may struggle to close pre-sales and down payments on planned properties are unlikely to cover the initial investment and construction costs.
With labour shortages still being a chief concern in the industry, and prices on raw materials continuing to rise, it is not a surprise that the cost of construction has gone up significantly over the last year or so.
Developers are currently weighing the costs of construction against the tightness of the labour market. At the moment, there is ample demand for construction jobs, but how many projects are deferred to delayed will naturally have a significant impact on employment in the sector.
A large concern in the industry at the moment is the opportunity cost of developing buildings that people would want to buy but not be able to afford – something that might be even likelier in 2023, given that (according to the aforementioned consumer survey), over one-third of Canadians are cutting back on expenditures in anticipation of a recession. Some banks have even noted increases in mortgage defaults and foreclosures, with rising interest rates severely impacting those with variable-rate mortgages.
Another concern is that if the recession and its impact on delaying construction projects is large enough, people may move out of the cities, which could in turn increase vacancy rates in apartment buildings and rental rates. But this seems unlikely, given that fears of a crippling recession have cooled in recent months.
A drop in value may also have an indirect impact on secondary lending markets. As prices drop, those in the pre-sale phase of their purchase will lose the equity they were counting on as part of their down payment and may struggle to close the deal and afford a mortgage via traditional financing (due to higher interest rates). They might then turn to alternative financing options, the impact of which is hard to predict currently
According to experienced financial advisors, a downturn in the market is the ideal time to review strategy, as there is little that individual businesses can do to reverse a recession. At this time, it is crucial to have an expert on hand as a steady hand helping you guide the ship. It’s an opportunity to review the company’s liabilities, assets, goals, organizational structure and tax framework, both to help the business weather choppy seas and to rechart the course on the other side of the storm.
There is a silver lining, however – an economic downturn is the best time for you to re-evaluate your business strategy and model.
At Smythe, our Tax and Advisory teams are experienced in helping clients of all sizes navigate a recession. There is no one-size-fits-all strategy, but with decades of experience in the real estate and construction industry, we can help you capitalize on the opportunity at hand and prepare your business for upcoming challenges. Reach out to us to see how we can help you today.